What Crypto Is Backed By Gold (Bridging Traditional Finance To The Digital World)

16 Dec 2023 by Harry Newman 3 min read

In the world of cryptocurrencies, knowing what crypto is backed by gold is important as it represents an innovative approach to traditional asset security and modern blockchain efficiency.

As cryptocurrency mass adoption grows, more real-world assets move on-chain, allowing users to trade assets in a way they wouldn't usually be able to.

Within this guide, we will explore gold-backed cryptocurrencies, popular examples and their role within the financial ecosystem.

Essentially gold-backed cryptocurrencies are digital assets that have each unit backed by a specific amount of physical gold.

Understanding Gold-Backed Cryptocurrencies

A gold-backed cryptocurrency has each unit pegged to a fixed quantity of physical gold.

This approach mixes the stability of gold with the digital agility of cryptocurrencies, aiming to offer a reliable alternative in the volatile crypto market.

Typically the physical gold is held in reserves and audited for compliance, ensuring that each crypto token has a real-world asset backing its value.

The concept of combining gold’s stability with the efficiency of crypto addresses investors' and traders' concerns about the usual volatile and unbacked nature of many cryptocurrencies.

Gold has a historic role as a store of value and a hedge against inflation, which makes it an appealing asset to own.

This also makes it a good asset to back cryptocurrencies with.

Gold-backed cryptocurrencies can be bought and sold on exchanges just like any other cryptocurrency and can also be used to purchase goods and services online.

How Gold-Backed Cryptocurrencies Work

Gold-backed cryptocurrencies involve the tokenization of physical gold, where each token represents a specific quantity of gold, for example, 1 gram per token, but this varies depending on the cryptocurrency, it can be as little as a fraction of an ounce.

This tokenization process is secured and validated through blockchain technology.

The physical gold that backs these cryptocurrencies is stored in secure vaults, this is through a bank or other third-party institution.

Regular audits by independent parties are conducted to ensure transparency and build trust amongst investors.

Most gold-backed cryptocurrencies are ERC-20 token standards built on the Ethereum blockchain, this is due to its universal acceptance and compatibility with anything Ethereum-based.

A main benefit of gold-backed cryptocurrencies is that you can trade them 24/7, there is no allocated trading time, which makes it more accessible to users.

What Crypto Is Backed By Gold - Examples

Pax Gold

PAX Gold PAXG is a notable example of a gold-backed cryptocurrency.

Each PAXG token is backed 1:1, meaning there is a PAXG coin for each ounce of gold in rotation covered by the Pax Gold protocol.

The gold is stored in LBMA vaults in London.

If you own PAXG, you also own the underlying physical gold, held in custody by Paxos Trust Company.

The main goal of Pax Gold is to make gold more tradeable, as the physical commodity is not easily divisible or easily transported. This virtually eliminates minimum buy limits for gold, as investors can buy small amounts through cryptocurrency.

Tether Gold

Tether Gold XAUt is a stablecoin that provides ownership on a 1:1 ratio with gold.

This allows users to have access to a stablecoin that also provides ownership of physical gold, whilst avoiding the drawbacks associated with physical gold like high storage costs and limited accessibility.

Goldcoin

Goldcoin GLC is the first fractionalised gold-backed asset. Due to its fractionalised nature, you can buy any amount of Goldcoin at any time.

The backing is a ratio of 1000 Goldcoin per ounce of gold. This backing makes it a much less volatile investment than many other cryptocurrencies, which are not pegged to a stable asset.

All of the above tokens are ERC-20 standard tokens on the Ethereum blockchain.

Gold-Backed Cryptocurrency Benefits And Challenges

Gold-backed cryptocurrencies, whilst more stable than traditional cryptocurrencies, carry risks.

Benefits

Investing in gold-backed cryptocurrencies can be an innovative diversification tool, potentially offsetting the high volatility most cryptocurrencies experience, and adding a layer of security through the gold backing.
Gold-backed cryptocurrencies offer liquidity and divisibility of digital assets, coupled with the stable value of gold. They enable easier and fractional ownership of gold, which is not possible with just physical gold due to logistical constraints and cost.

Challenges

The gold markets can still fluctuate in price, this can be due to potential technological risks in blockchain platforms, and the changing regulatory landscape.
Gold-backed cryptocurrencies can have trouble with low liquidity, this is due to the limited investor base as traders look to gain larger profits elsewhere.

Final Thoughts

Gold has a reputation for being one of the safest investments, but owning physical gold isn't particularly easy, especially in fractional amounts.

Asking what crypto is backed by gold is an important question, as you can blend the stability of gold and the efficiency of blockchain technology.

This makes it significantly easier for individuals to own gold without ever needing to store it themselves.

In the future, perhaps gold-backed cryptocurrencies and stablecoins will play a more significant role in the cryptocurrency ecosystem.

What Crypto is Backed By Gold - FAQ

How safe are gold-backed cryptocurrencies as an investment?

Whilst gold-backed cryptocurrencies offer a degree of stability through gold backing, they are not devoid of risks, which include market fluctuations of gold itself and any regulatory changes.

Is it possible to redeem your gold-backed cryptocurrency for physical gold?

Yes, some gold-backed cryptocurrencies will allow converting your crypto for physical gold, but this will require a minimum amount you have to redeem.